Navigating startup bankruptcies: risks and investor advice
In recent months, bankruptcies have surged in the construction, hospitality, and retail sectors. Startups are not immune to this trend. Despite recent positive stories of significant investments or successful exits, such as Henchman (sold for USD 160 million to LexisNexis), Techwolf (raised EUR 40 million), or Donna (raised EUR 1.5 million), startups also face bankruptcy.
The impacts of rising interest rates and persistent inflation are taking an increasing toll. Recently, influencer platforms Influo and Connus, dark kitchen Casper, crypto platform Bit4You, and job platform Karamel.career have gone bankrupt. Other startups are quietly sold (often for a pittance) to avoid public humiliation or bankruptcy.
Investment Tips for Startups
- Caveat Emptor: whether it’s a crowd loan, win-win loan, convertible loan, or direct equity investment, do your due diligence before investing in a startup. Assess the risks. Do not rely solely on the information provided by the involved company or mandated broker.
- Diversify your investments: typically, only a small percentage of startups succeed. This remains risk capital. Do not forget this.
- Be proactive and monitor your investment: ask questions and insist on regular updates.
What to do if things start to go wrong?
As a creditor:
- Consider suspending deliveries or requiring advance payments. Assess your recourse options (retention of title, pledge).
- If there is still trust, consider converting your claim into equity to gain (more) control over the startup.
- Do not forget to timely file your claim (in judicial reorganization or bankruptcy).
As a director:
- If the continuity of a company is at risk, directors must intervene in a timely manner (e.g., apply the alarm bell procedure or mandatory filing for bankruptcy upon meeting insolvency conditions).
- There are various avenues to consider for rectifying the situation, such as restructuring, selling shares or assets, restarting via judicial reorganization, liquidation, silent bankruptcy, and bankruptcy. This requires thorough planning and advice.
- Do not forget your directors’ liability insurance.
- Decisions made in the months leading up to a bankruptcy can affect potential director liability afterward. Directors should not take this lightly.
As an investor:
- Typically, investors are left empty-handed. Startups usually have little tangible fixed assets, and investors are among the last to be paid in a restructuring or bankruptcy.
- In the case of a win-win loan, a certain percentage of the investment can be recovered from PMV or the government through a tax credit in case of default. If the conditions for the received tax benefits are not met, the win-win investor risks losing these benefits.
- In case of manifest errors, the board can potentially be held liable, but this is less straightforward for startups due to the inherently risky nature of such ventures.
Seek proper guidance
The documentation regarding an investment in a startup is often complex, and not everyone understands the legal jargon or knows their rights. Insolvency is a distinct area of law that is rapidly evolving. It is advisable to seek guidance from an experienced lawyer at the time of investment or during restructuring.
Need assistance?
Do you have questions about investing in a startup? Are you a company in difficulty, a director, an investor, or a creditor of a struggling company? Do not hesitate to contact us. We have extensive expertise and are happy to assist you.
Anthony Van der Hauwaert, lawyer – partner | Racine
